Global demand for commodities: Is the bull cycle really over?

WASHINGTON — With the inevitability of the Federal Reserve QE (quantitative easing) “tapering” looming near and the slowdown of global economies, many analysts and traders are wondering, “Has the commodity bull cycle come to an end?”

In June, the World Bank cut its forecast for global economic growth from 2.3 percent to 2.2 percent, claiming slower than expected expansion in China, India and Brazil along with persistent problems in Europe.

Many investors fear the sharp rise in borrowing costs, which has been brought on by the cash crunch in China’s money market due to a crackdown in currency speculation.

Some are concerned that China could be at risk for its own financial meltdown stemming from a tightening of liquidity, with ripple effects throughout global financial markets.

Corn stable

Overall, however, this is not likely to significantly affect the U.S. corn market.

“Those that only look at Chinese GDP growth percentage as a proxy of commodity demand are missing the big picture,” said Kevin Roepke, manager of global trade for the U.S. Grains Council. “7.5 percent growth on an $8.2 trillion economy equates to more than $600 billion a year.

“Compare that to 10 percent growth on a $5 trillion economy and that’s $500 billion a year.”

Investment bank JP Morgan issued the first overweight call in commodities since September 2010.

“Now we move to recommend a net long, overweight exposure for institutional investors for the first time in more than two years,” said a JPM statement obtained by ZeroHedge.

This statement contradicts another i-banking titan, Barclays, who has initiated a warning on China and states that GDP growth could stall to a mere 3 percent or less within the next three years.

The end result is still not clear, but the important message is that not all commodities are created equal.

Basics vs. luxury

“I think when you’re discussing commodities as a whole, you have to disaggregate staple commodities from luxury commodities,” Roepke said.

“With rising incomes in China, meat and feed grains are moving into that ‘staple commodity’ arena and out of luxuries.

“You may not find jewelry stores packed in Guangzhou anymore, but you’ll find huge demand for pork and feedgrains as people move from a plant starch based diet to an animal protein based diet.”

Just getting started

David Hightower of the Hightower Report agrees.

“It would be incorrect to assume the commodity bull cycle has run its course,” Hightown commented at a global commodity conference.

“Global demand will meet and/or outstrip the capabilities of production. Global feed demand is just in its infancy. For example, beef demand in China isn’t even on the map.”

Hightower also went on to say that high grain prices are a necessity to ensure the production required to keep up with demand.

Energy demand

Energy is also a critical component when calculating overall commodity prices.

“Energy is the lynchpin between all commodity movements,” said Richard Feltes of RJ O’Brien.

Feltes disputes the claim that lower U.S. gasoline consumption will translate to lower commodity prices.

The growing demand for energy in Asia, especially China, as a great indicator of the world’s ravenous hunger for commodities, according to Feltes.